Is Narendra Modi's new Pradhan Mantri Jan Dhan Yojana — providing two bank accounts each to 75 million poor families, an overdraft of Rs 5,000, accident insurance cover of Rs 1 lakh and a life cover of Rs 30,000 — a breakthrough in financial inclusion? Or is it a Rs 75,000-crore loan mela, as suggested by columnist Debashish Basu?

Indira Gandhi nationalised banks in 1969 to promote financial inclusion. The Congress has pushed that theme ever since. In 1974, it launched a Differential Rate of Interest scheme (loans at 4% to the poor), which was marked by limited reach and massive leakages.

This was followed in the 1980s by the Integrated Rural Development Programme (IRDP), providing concessional loans of Rs 4,000-6,000 to the poor to buy income-generating assets.

This gave rise to 'loan melas'. Public sector banks were forced to give mass loans in stadiums presided over by Congress honcho Janardhan Poojary. Later evaluation reports showed that loan beneficiaries were overwhelmingly non-poor. Bank staff demanded bribes of up to one-third the subsidy. Politicians of all parties told borrowers not to repay. So, default was massive. The impact on poverty was negligible.

In the last decade, the Congressled government repeatedly emphaemphasised financial inclusion, aiming at one bank account for every family using a network of banking correspondents (BCs) to link banks with villagers.

This was to be linked ultimately to Aadhaar, the incomplete unique identity number scheme, to facilitate cash transfers to the needy. Between March 2010 and December 2013, banking connectivity was extended from 67,694 to 3,28,679 villages, and 229 million basic accounts were opened, says banking expert Tamal Bandyopadhyay. But studies showed that most new accounts were totally or virtually unutilised.

Hibernation Season

The new scheme envisages enrolling 60,000 more BCs to link villagers to banks. Microfinance expert Sanjay Sinha says the number of transactions per account through BCs has barely been two each year. If so, very high commissions will be required to make BCs viable. Banks will face high costs in opening and maintaining small, semi-dormant accounts.

Modi is right to emphasise financial inclusion. Only 35.2% of Indian adults have bank accounts today. But his new scheme ignores lessons from failures of the Congress models he is extending. The first lesson is that speed and mass loans will yield blazing headlines and initial praises for effort, but will prove recipes for failure.

The naive may be impressed that the scheme was launched within a fortnight of Modi's announcement in his Independence Day speech, and that no less than 15 million bank accounts were opened on the first day. In fact, this is utterly dismaying.

It's impossible to reach millions of truly excluded people so quickly. Unsurprisingly, investigations have already shown that many people paraded by banks as new account holders turned out to have accounts already. Forcing banks to produce so many bodies instantly before TV cameras is a recipe for theatre, not inclusion.

Instead of being sobered by this, Modi has told the public sector banks to reach the target of 75 million new bank accounts by January 26, 2015, against the original deadline of August 15. This will mean even more theatre parading as inclusion.

As happened in the IRDP, politicians will advise the poor not to repay their overdrafts. Banks will do their best to sabotage the overdraft scheme, with the poorest and weakest losing out. Ironically, this may in some ways be better than loans for all, which will mean Rs 75,000 crore for 150 million accounts. If these are not repaid, the banks will lose Rs 75,000 crore at a time when the P J Nayak Committee says they need to raise an additional Rs 5.8 lakh crore just to meet the new Basel norms for capital adequacy.

Principal for Keeps

RBI governor Raghuram Rajan has warned banks against giving subprime loans. Yet, Modi is forcing banks to do exactly that. The guarantee fund to backstop overdrafts has only Rs 1,000 crore, a drop in the ocean.

If villagers don't repay loans, will banks deduct this from their savings and future cash transfers? Will banks levy hefty penal charges, or close defaulting accounts? What will this mean for financial inclusion? Modi is silent on these difficult but important questions.

Speed Thrills But Kills

Please abandon speed. Serious financial inclusion requires sustained efforts for several years, with an emphasis on quality rather than speed or target practice. Cellphone banking is the ideal technology for financial inclusion, and so, broadband extension to every village is required.

The Aadhaar exercise needs to be completed quickly. Above all, the government needs to shift from subsidies of individual items to cash transfers directly to the new accounts, ending the sorry spectacle of massive dormant accounts. All this will take time. Financial inclusion is desirable.

But the new scheme's design scheme needs a big rethink. By focusing on speed, Modi is encouraging loan melas rather than inclusion. Horror of horrors, he is getting Congressised.